EIU Global Forecasting Service

Territorial disputes in the South China Sea lead to an outbreak of hostilities

Moderate probability, High impact; Risk intensity =

January 24th 2018Introduction

The national congress of the Chinese Communist Party (CCP) in October marked a watershed in terms of China's overt declaration of its pursuit of great-power status, with the meeting setting the goal of becoming a "leading global power" and having a "first-class" military force by 2050. A clear implication is that the country intends to be more assertive in international matters, at a time that the US global hegmony is declining.

Analysis

Concerns about how China intends to deploy its expanding hard-power capabilities in support of its territorial and maritime claims are likely to encourage other countries to hedge against it, despite its economic heft. At a recent Asia-Pacific Economic Co-operation (APEC) meeting, the informal "Quad" alliance of Australia, India, Japan and the US met for the first time since 2007, seemingly because of concerns about China's regional ambitions. A potential flashpoint could be territorial control of the South China Sea; the sovereignty of the islands and reefs there remain a major source of disagreement between China and several members of the Association of South-East Asian Nations (ASEAN). Amid increasingly aggressive moves by China to place military hardware on disputed islets, the other claimant countries in the region have sought to beef up their own maritime defence capabilities. However, the ASEAN claimants have been weakened by the "America First" foreign policy of Donald Trump's administration, which has seen a partial abdication of US leadership of global affairs. This will further embolden China in exerting its claimed historical rights in the South China Sea. An acceleration of China's island reclamation measures or the declaration of a no-fly zone over the disputed region are distinct possibilities. Our central view is that an outbreak of military conflict arising from the territorial dispute is unlikely. However, the possibility that small-scale clashes could escalate into a more serious incident cannot be ruled out.

Conclusion

Were military clashes to occur, the economic consequences would be significant. Economic growth would suffer, and regional supply networks and major sea lanes could be disrupted.